Is This the Answer We've Been Looking For?

In the time since the crisis unfolded, the U.K. government has been under criticism for not doing enough to stimulate a mortgage market revival.

But it might just redeem itself. The latest version of the long-awaited and debated Crosby report could have some of the answers many in the industry have been searching for. A revitalized mortgage market could also help fill the gap left by the struggling securitization market, which has been cut in half compared with 2007 figures.

More importantly, the report finally recognizes that RMBS structures are genuine funding instruments for mortgage lending. It noted that RMBS and other mortgage-based instruments are necessary for the efficient functioning of the financial and lending markets, a point the U.K. Council of Mortgage Lenders (CML) made many months ago.

In April, Sir James Crosby, the author of the report, was still resisting the need for government intervention. Last week's version of the report, however, found that, if left to its own devices, the RMBS market will not see a return of investor demand until at least 2010.

It recognizes that the shortage of mortgage finance could be the "primary mechanism through which the consequences of turmoil in the financial sector would be transmitted to consumers and the wider economy." According to Crosby, even well-capitalized banks are unlikely to return to "normal" lending volumes and practices in the near term.

Crosby, in direct contrast to statements made in his initial findings, now said that government intervention is the way to stop a spillover effect - a view shared by many market players.

Market analysts said that the Crosby initiative not only provides the government with an opportunity to restart the housing sector, but also the possibility to "redirect" lending in a way to create a more "healthy" mortgage lending market.

"The guarantee described in the report sounds quite similar to the Spanish state guarantee provided to specific tranches of SME CLOs in the past," said Jean-David Cirotteau, a Societe Generale analyst. "The report also says that to be effective, a total of around £100 billion ($147.68 billion) would need to be guaranteed over 2009 and 2010," he said.

Crosby believes that government intervention could provide a cyclical correction in the housing market and stop its turmoil from turning into something much more serious, with all that would ultimately imply for the wider economy. Although it remains uncertain whether Crosby can limit further deterioration in the broader markets, analysts said that such government intervention is the right step toward recovery from the crisis.

The guarantee is suggested to be directed toward triple-A RMBS notes and triple-A covered bonds issued to fund new lending. The government guarantee would be provided via a regular auction process. It has also been suggested that the government should have recourse to lenders in case of incurred losses, in a way to ensure it should not bear any credit risk, Unicredit analysts said.

Although the revised report now offers some real solutions, there remain some technical questions that could slow implementation of the initiatives - and if the CML is to be heard, time is of the essence. It has urged the government to proceed as quickly as possible in seeking the permissions necessary to proceed, as the dearth of funding is a major constraint in the current mortgage market.